Report 96116 Summary - July 1997

Department of Motor Vehicles:

Overstated Costs for Registration Information Have Resulted in Inequitable Charges to Customers

Results in Brief

In fiscal year 1989-90, the Department of Motor Vehicles (department) overstated its costs
for providing information to customers. This miscalculation resulted in the department's
charging unreasonable, inequitable fees for information services products. Further, because it has not
reassessed its costs or revised its fee schedule during the last seven years, the department cannot
ensure that its current fees are fair or that they cover the department's costs to deliver registration
and licensing information.

The department fulfills a variety of responsibilities in addition to supplying customers with registration information. These responsibilities include regulating
the issuance and retention of driver's licenses, protecting the public interest in vehicle and
vessel ownership, and providing personal identification services to drivers and nondrivers. While
carrying out these functions, the department acquires and compiles registration and licensing information
in its database. The California Vehicle Code allows the department to sell this information but
requires it to charge fees that are sufficient to at least cover the cost of providing the information.
The department's Office of Information Services (OIS), now called the Information Services Branch,
has been the unit primarily responsible for managing the delivery of this information to customers.

Our review focused on the department's process for establishing the fees it charges for
registration and licensing information and on whether the department bases those fees upon actual costs.
During our review, we noted the following issues that have affected the fees the department
charges its customers:

· The department used flawed methods in fiscal year 1989-90 to calculate its costs to create
and maintain its database. As a result, the department significantly overestimated its costs to
provide registration and licensing information to its customers. Because the department overstated
these costs, the fees the department charged some customers were higher than necessary.
Moreover, because the department has not updated this calculation of costs or its fee schedule, the
department cannot assure the fairness of its fees, nor can it properly identify or manage
product profitability.

· After determining its costs to create and maintain the database, the department did not
equitably distribute those costs to all products sold by OIS. Specifically, the department allocated the costs to
only three of six products that should have received a proportionate share; therefore, the costs
for three of the information products are too high while the costs for the other three are too low. The department thus cannot assure that
the fees it established for the various products fairly represent the department's cost of
providing these products to customers.

· The department did not retain all of the support for the data it used to calculate unit costs
in fiscal year 1989-90, so we reviewed the volume data the department compiled for fiscal
year 1995-96. Because we found errors in this current volume data, we question the reliability of
the 1989-90 information.

· The department's paying customers are subsidizing its costs to provide registration and
licensing information to government entities. Although the California Vehicle Code, Section 1811,
requires the department to charge fees sufficient to cover its costs of providing information to
its customers, Section 1812 of the same code specifically prohibits the department from
charging certain entities, including the State and the federal government, for information obtained
from the department's records. The department therefore structured its fee schedule so that the
prices paid by individuals and private entities would cover total costs.

In addition we also estimate that, over the past six fiscal years, the department has
generated an average profit of $16.5 million per year from sales of registration and licensing information.
Also, in fiscal year 1995-96, the department generated a profit from sales to individuals and
private entities that purchased less than one-third of the information the department provided to all of
its customers.

Further, we identified a few instances in which the department did not comply with the law
when providing registration and licensing information. For example, the department released
confidential residence addresses without obtaining the required written assurance that the information would
be limited to statistical research and reporting purposes and that the customer would not use
the information to contact any person. When it does not comply with the law, the department
cannot be sure that customers are fully aware of the restrictions the law imposes on the use of such confidential information, and the department jeopardizes individuals' privacy. In another instance, we found that, contrary
to the requirements of the law, the department also provided information to some customers
without ensuring that the fees charged would cover
related costs. When this occurs, the department must subsidize these costs by charging
other customers more than necessary or by using taxpayers' money.

Recommendations

To establish reasonable and equitable fees for its registration and licensing information the
department should take the following actions:

· Using guidelines similar to those described in Appendix B, update its cost calculations
and compile reliable volume data to use in its calculation of unit costs. The department should
also implement a system to track and report the number and type of records provided to private
and government entities.

· Reassess and update its costs periodically to ensure that the costs represent current
activities, and modify the fee schedule when necessary.

In addition, the Legislature should consider whether it is reasonable for paying customers to
continue subsidizing the department's costs of providing information to government entities.

After assessing and updating its unit cost calculations, the department should establish fees
that cover costs and provide for a reasonable profit margin.

Further, to ensure that it protects the confidential information in its records, the department
should make certain that it complies with applicable laws before releasing any information.

Finally, the department should adhere to its fee schedule when charging customers for
registration information.

Agency Comments

Although the Business, Transportation and Housing Agency is implementing some of our
recommendations, it believes that the tone of the report is not consistent with the relative significance
of the audit findings and that we did not consider all the information the department provided.
Further, the agency states that implementing our recommendations could increase taxes and fees charged
to the public and could result in increased profits for information vendors and insurance companies.